FATCA Relief On The Way For US Dual Citizens

American taxpayers with dual citizenship can soon renounce their US citizenship without facing exit taxes and other penalties if a new law passes through Congress.

The government has recognised that the new Foreign Account Tax Compliance Act (FATCA) has put an onerous financial burden on thousands of US expats whose only connection with America is that they have dual nationality.

Under US law, that makes them a taxpayer regardless of where they live in the world.

Since the introduction of FATCA in July 2014, many foreign banks and financial companies have turned away US clients to avoid signing up to the reporting rules.

Loss of rights

This has led many US expats to have credit and loans refused and bank accounts closed.

Now, the US government is giving some respite to taxpayers whose only link with the US is dual citizenship even though they may never have visited the country.

The draft legislation ‘Simplify The Tax System: Provide Relief for Certain Accidental Dual Citizens’ will allow dual citizens to give up their US citizenship without penalty.

The new rules will only apply to dual citizens connected to the US by birth who only have minimal contact with the States.

These taxpayers will have the exit tax and other penalties waived – but they will also lose their rights to a US passport.

How the new rules work

The new law proposes several rules for dual citizens to relinquish their status:

  • At birth, they were citizens of the US and another country
  • They have always lived outside the US or have lived outside the US since the age of 18 years six months
  • They have never held a US passport or only held a US passport to leave the country
  • Renounces citizenship within two years of January 1, 2016, or the date when they discovered they held US citizenship
  • Settles their US tax affair on renouncing their citizenship

The proposal is a long off becoming law – it’s included in the 2016 Budget proposals. These proposals are subject to a lot of horse-trading and amendment before they become law, although the majority Democrats argued against FATCA for some time.

The effect of the new rules would be to break the link with the US for dual citizens who only have a tax relationship with the country because of birth.

Around 7 million US expats are estimated to be involved in FATCA worldwide, and a relatively small number of these expats hold dual nationality.

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